One of the many misjudgements made by the Rudd Government in managing the Australian economy this year has been their almost fanatical belief that Australia would be shielded from the worst of the global financial crisis because of our trade with China. For the first part of this year in addition to the “War on Inflation”, Rudd and Swan were also pushing the line that our significant exports to China would keep the Australian economy ticking over nicely despite the problems brewing in the economies of the United States and the Eurozone.
The problem with this thinking is that it neglects the fact that China is not our biggest export destination; Japan is. It also highlights the lack of international experience the government has and also questions if the Reserve Bank really understands how global trade works in the 21st century. Maybe the government has found a secret destination for Australia’s exports? Or maybe they just do not understand where our exports go?
If we look at the top three export destinations for Australian products and services you can quickly appreciate that Australia is not shielded from the global economic slowdown at all. In fact we have no shield, and any protection we did have was negated via the Reserves Bank’s internet rate blunders early in 2008.
Australia’s top export markets. 2007-2008. ($AUD Millions)
If we add together the figures for all European Union economies then the EU would be our 3rd largest export market with total exports in 2007-2008 adding up to $29,210 Million AUD. Therefore three out of four of our top export markets are in an economic slump and I doubt China is going to have a great 2009 either.
I suspect one of the reasons Australians are bombarded with the “it’s okay we export to China” propaganda is because of Rudd’s dangerous obsession with China. The reason for this obsession is that he has has little work experience outside politics apart from his time as a diplomat in China, so he is in his comfort zone when talking about China and thus he has dragged Australia’s focus in that direction as well. What the mainstream media have generally failed to pick up is that Rudd may have built a good relationship with China, but he has done so at the expense of Australia’s relationship with Japan.
Japan is Australia’s largest export destination but China is our largest overall trading partner. But we import more from China than we export whereas with Japan we export much more than we import. Therefore simply put, Japan is a more profitable trading partner for Australia but thanks to the Rudd government, Australia’s reputation in Japan has been tarnished. First by an over zealous policy against whaling, and then by Rudd’s snub of Japan during his jet setting days just after he took office. (and he continues to pump tonnes of CO2 into the atmosphere during his VIP jet world tours)
Of course the government denies any damage has been done to the Australia-Japan relationship, but I can tell you as an Australian in Japan that our country is on the nose. This was blatantly obvious when Rudd finally visited Japan and received almost no coverage by the Japanese mainstream media. I am also often questioned by Japanese why Australia has become pro-China and is ignoring Japan….it seems they thought our two nations had a better relationship. (so did I actually)
The Japanese economy is currently feeling the full force of the global slowdown. This is no surprise as few countries are as plugged into the global economy as Japan and the extent to which world trade has fallen was highlighted recently, when industrial output in Japan fell by a record 8.1 percent in November. (the biggest fall since statistics started to be released in 1953)
This downturn in Japanese industrial activity will have major consequences for Australia and if the government thinks that the pre-Christmas handouts to tax payers will significantly buffer the Australian economy from this, then they are bigger fools than I first thought. Stores like Harvey Norman might have enjoyed some healthy Christmas sales but come 2009 they will be shutting stores and the Christmas cheer will be soon long gone.
Economic conditions in Japan act as an excellent indicator of how the global economy is tracking. Japan’s major trading partners are the United States and China and together they form the big three of global trade. With two out of the three in a major economic downturn you would have to be the ultimate optimist to think China is somehow going to keep chugging along nicely. My bet is China is about to enter a major economic downturn and that the heady days of double digit GDP growth are over.
There is also the danger of major social unrest in China, for if millions of Chinese workers find themselves out of a job as a result of the economic downturn, then things could get very nasty. Economists and market analysts often try to maintain the China boom message by playing down the possible threat to the economy posed by social unrest, however the threat is significant and I sure the authorities in China will be doing all that they can to keep as many people employed as possible. (hence the reason for the major government spending program they announced some weeks ago)
There is no doubt that China is one of Australia’s most important trading partners but to ignore our relationship with Japan is a risky strategy. In these difficult times a wiser course of action would be to hitch our wagon up to as many horses as possible, not just picking one and hoping it does not go lame part of the way through the journey. For Australia to avoid a deep recession we need a strong Japanese economy even more than we need a strong Chinese economy. I just hope the government remembers that in 2009.